The Federal Reserve: Love it or Hate it

[adios]

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It might be a little results oriented, but I like the Fed because it has been successful. Since the Depression, there has not been a severe economic downturn (defined by joblessness and GNP) or unmanageable inflation. The economy has functioned particulary well over the last 20 years.

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Sorry iron this is silly reasoning. The Fed has been around since 1913.

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yes, but the fed only really began operating as it currently does far later in its existance.

and to those who say the fed is theoretically flawed, what is the theoretically correct system? no intervention at all? that would create other problems and distortions that would take a long time to correct with each passing cycle and would always swing far from "equilibrium."

there are costs to a centrally controlled monetary system (many have been mentioned), but i don't think they are massive enough to warrant the costs of a totally free economy where human irrationality causes swings that would widely distort the system and affect everyday life of those in the system.

Barron

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The potential for the Fed to screw up is the same as it was in 1913, 1929, 1930-1938, 1970-79, etc. Paul Volker was the first Fed chairman to start the disinflationary process. Alan Greenspan continued on and I believe had the longest reign as Fed chairman. You guys don't know what it was like pre Volker and Greenspan. The potential to screw up is still there. A major change in Fed policy is only an appointment away. So sorry your rational is silly too.

Edit: Here's another point that people on the left have made constantly on this forum. Real wages have basically stagnated at best for lots of people in this country from 1982-present. Not saying the Fed is the main culprit but when we say the economy has done well over the last 20 years I think that needs to be elaborated on. Here's a linke to some wage data in the Presidents most economic report:

President's Economic Report

For instance on page 286, hours and earnings in private nonagricultural industries in 1982 $ have increased by a [sarcasm]whopping[/sarcasm] 2.1% since 1982. They've actuall declined by over 10% since 1965. By no means has everyone prospered in the economy over the last 20-25 years either.

[hmkpoker]

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For the austrians here, what statistics should we be using to measure the health of an economy?

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This is like asking the Austrians, "Ok, so if you don't like democracy, how SHOULD we pick our national leaders?"

[DcifrThs]

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It might be a little results oriented, but I like the Fed because it has been successful. Since the Depression, there has not been a severe economic downturn (defined by joblessness and GNP) or unmanageable inflation. The economy has functioned particulary well over the last 20 years.

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Sorry iron this is silly reasoning. The Fed has been around since 1913.

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their whole empirical reasoning is silly. Unless they want to show why the fed was responsible for American prosperity i don't see what the point is. Correlation does not imply causation. American prosperity would be greater had the fed not intervened and future tax payers and credit community in America are going to pay a large part of the price for current prosperity.

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if you don't manage the system, the distortions would be massive in terms of daily life of people during booms and busts. the length of both of those would also be much longer. correlation doesn't mean causality and prosperity isn't the issue. the prosperity is an after affect that isn't necessarily attributable to the fed.

what is attributable to the fed is the changes in CPI (however you measure it) and GDP changes vs. trend (or industrial production or whatever you want to use). when the fed is purposefully targeting major determinants of those two indicators, their improvement can be attributable to the fed.

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Also they have yet to respond to any criticism against the fed's record or theoretical design rather than continue to tote "look, we have computers today, we didnt have that in 19th century therefore the fed is good and deserves credit for all of it."

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so what would the alternative be. please explain the theoretically optimal system and what the economy woudl look like under it?

what indicators would you use?

how woudl they be measured and judged?

instead of only stating the problems with the current system, please suggest the alternative and all the accompanying theory and indicators you'd use to judge it.

Barron

[Zygote]

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that extrapolation is unavoidable and thus business cycles will always be around regardless of whether we have a fed or not.

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have been cycles gotten larger or smaller since the creation of the fed?

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much smaller. at least since the introduction of the current day management system.

there was a brief period of increased amplitude due to massive global shocks to the system (bretton woods collapsing). but other than that, no matter what measure of cyclicality you use, the amplitude has decreased significantly.

Barron

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want to cite a source?

i'll cite Friedman and Shwartz's "Monetary history of the US", which was one of the earliest empirical cases pointing towards money supply changes from central banks historically having been the most significant source of business cycles. Much data has come since to back this up.

Also read "The Monetarist Case for Rules" in Bernanke's macro text book or the business cycle chapter. Then read anything about the austrian trade cycle theory and try reconcile the information and rethink whether central banking and monetary policy are virtually the sole source of any cycle (defined as changes in aggregate economic activity" rather than fluctuations in a single or specific economic variable)

[Zygote]

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so what would the alternative be. please explain the theoretically optimal system and what the economy woudl look like under it?

what indicators would you use?

how woudl they be measured and judged?

instead of only stating the problems with the current system, please suggest the alternative and all the accompanying theory and indicators you'd use to judge it.

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free banking and entrepreneurial activity. they will be judged by ability to please consumers.

if the fed is so good why do they outlaw competition?

[iron81]

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For the austrians here, what statistics should we be using to measure the health of an economy?

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This is like asking the Austrians, "Ok, so if you don't like democracy, how SHOULD we pick our national leaders?"

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I'm pretty good in ACese, but this flew completely over my head. You guys keep saying how everyone's life will be better under AC, but where would the evidence show up?

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if the fed is so good why do they outlaw competition?

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This isn't any more true than the first 10 times its been claimed:

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Andrew Williams, a spokesman for the Federal Reserve in Washington, D.C.:

"There is no law that says goods and services must be paid for with Federal Reserve notes. Parties entering into a transaction can establish any medium of exchange that is agreed upon." Link

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[DcifrThs]

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For the austrians here, what statistics should we be using to measure the health of an economy?

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This is like asking the Austrians, "Ok, so if you don't like democracy, how SHOULD we pick our national leaders?"

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so analogously Austrians don't believe in measuring the health of an economy like those who don't believe in democracy don't believe in picking their leaders?

so how would you suggest we judge if an austrian system was working better or worse than what we have now? you have to have some measures to judge the difference, right? am i missing something obvious that states that the second austrian economics is enstated it is uncontestably obviously optimal and we no longer need to worry about trying to measure the health of an economy?

or is it that no matter what the "state" of the economy is at present, it isn't important to austrian economics (this could be the case, i just don't know) since it holds no barring on the case for austrian economics.

is this what you meant? if not, what do you mean by that analogy?

Barron

[DcifrThs]

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that extrapolation is unavoidable and thus business cycles will always be around regardless of whether we have a fed or not.

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have been cycles gotten larger or smaller since the creation of the fed?

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much smaller. at least since the introduction of the current day management system.

there was a brief period of increased amplitude due to massive global shocks to the system (bretton woods collapsing). but other than that, no matter what measure of cyclicality you use, the amplitude has decreased significantly.

Barron

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want to cite a source?

i'll cite Friedman and Shwartz's "Monetary history of the US", which was one of the earliest empirical cases pointing towards money supply changes from central banks historically having been the most significant source of business cycles. Much data has come since to back this up.

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what about all of the business cycles that occurred far before the advent of modern economic management or theory? think france in the 1500s-1600s or britain's feasts and famine when money was backed by gold before the increase in money supply of gold came from global exploration? all of those cases point towards horribly large cycles in economic production and sustinance of people far before fiat money or central planning came to be.

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Also read "The Monetarist Case for Rules" in Bernanke's macro text book or the business cycle chapter. Then read anything about the austrian trade cycle theory and try reconcile the information and rethink whether central banking and monetary policy are virtually the sole source of any cycle (defined as changes in aggregate economic activity" rather than fluctuations in a single or specific economic variable)

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what about growth in industrial production? that is a great measure of aggregate economic activity.

the source of business cycles again doesn't come from any one institution.

Barron

[hmkpoker]

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For the austrians here, what statistics should we be using to measure the health of an economy?

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This is like asking the Austrians, "Ok, so if you don't like democracy, how SHOULD we pick our national leaders?"

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I'm pretty good in ACese, but this flew completely over my head. You guys keep saying how everyone's life will be better under AC, but where would the evidence show up?

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This is like asking what metric we should use to figure out whether a Picasso is "better" than a Degas. The only way you can do that is to define art by an objective, absolute quantity, and that's impossible. Art is a very relative quality, and cannot be measured objectively.

Neither can the "economy." In theory, the best way to measure the "economy" is by the aggregate amount of utility that is produced. But that's impossible; utility is subjective and only demonstrable ordinally, not cardinally.

By which quality should society be measured? The gross amount of monetary transactions? The equality of distribution of goods and services? By the aggregate amount of observable dopamine transmissions in the status quo? The employment rate? The life span? The crime rate?

What do you do when it turns out that some people value different things than other people? How do you reconcile hippie-like people who don't like to work and live a very cheap lifestyle and are perfectly happy with it? And what happens when people elect to engage in activities that don't immediately yield some kind of elevated serotonin levels?

What statistic do you think should be the metric that reflects the ideal quality of human life?

[ianlippert]

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business cycles come from an inability to manage perfectly. when demand has been higher than previous periods, we order more (typically far more) on the assumption that the next period will have more of the same. it takes a realization of the decreased demand to reduce orders for the next period (again by too much). humans over-react and no matter what you do (as has been studied in oprations research), that extrapolation is unavoidable and thus business cycles will always be around regardless of whether we have a fed or not.


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I dont really see how this is irrational, mabey more just bad management. And of course there will be small cycles in particular industries, but how can you have an entire economy collapse from individual industries?

Your example works much the same way as my stock market example. If you dont take into account future demand and I do, I make a profit and you go out of business. Considering the level of competition in most industries I find it very unlikely that there will be much mismanagement from year to year among competant capitalists.